(Reuters) - Flybe Group Plc's <FLYB.L> shares surged 40 percent on Monday after the Sunday Telegraph reported that Richard Branson-founded Virgin Atlantic and British Airways owner IAG <ICAG.L> will battle it out to buy the regional airline.

Flybe has been in talks with multiple parties to sell itself as it grapples with falling demand, higher fuel costs and a weak British pound. On Friday it said Virgin was a potential buyer.

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IAG is a frontrunner in the race to buy Flybe, the Sunday Telegraph reported on Saturday, citing industry sources. Sky News had previously reported that Stobart Group <STOB.L> was also a likely suitor.

Flybe declined to comment when contacted by Reuters on Monday, while IAG did not immediately respond to a request for comment.

Meanwhile, EasyJet <EZJ.L> and Ryanair <RYA.I> have said they are not interested in buying Flybe.

Flybe has also said it would consider other options besides a sale, such as further reductions in capacity and costs.